Securities Act Release No. 6922

Exchange Act Release No. 29883

Financial Reporting Release 38

October 30, 1991

ACTION: Final rules

Roll-up Transactions

SUMMARY: The Securities and Exchange Commission ("Commission") today adopted rules intended to enhance the quality of information provided to investors in connection with transactions involving roll-ups of limited partnerships or similar entities. The new rules require heightened disclosure with respect to the fundamental changes and potential adverse effects arising from roll-up transactions, and the conflicts of interest, reasons for, alternatives to and fairness of such transactions. The rules also call for enhanced disclosure concerning valuation methods and additional pro forma financial statements. In order to highlight for investors the differing effects that roll-up transactions may have on investors in various partnerships, the rules require delivery of individual partnership prospectus supplements highlighting, among other things, the effects of the roll-up transaction on investors in each partnership. Technical amendments to the business combination registration statement forms under the Securities Act of 1933, Forms S-4 and F-4, and to Article 11 of Regulation S-X, also have been adopted.

In addition to the new disclosure rules, the Commission is today adopting amendments to Forms S-4 and F-4 and to Rules 14a-6, 14c-2 and 14e-1 under the Securities Exchange Act of 1934, establishing a 60-day minimum solicitation period for roll-up transactions, or, if shorter, the maximum period permitted under applicable state law.

EFFECTIVE DATE: October 30, 1991. The rules will apply to roll-up disclosure documents filed with the Commission or sent to investors subsequent to the effective date of the rules. Filings pending on or before the effective date of the rules will be subject to the rules.

FOR FURTHER INFORMATION CONTACT: Meredith B. Cross, Michael L. Hermsen or Amy S. Bowerman at (202) 272-2573, Division of Corporation Finance, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission today adopted subpart 900 of Regulation S-K,¹  technical revisions to Forms S-4 and F-4 under the Securities Act of 1933 ("Securities Act"),²  the registration forms generally used in roll-up transactions, and a technical amendment to Article 11 of Regulation S-X.³  The rules are applicable to registration statements filed with the Commission in connection with roll-up transactions, as defined in the rules. The Commission also has adopted rules establishing a minimum 60-calendar day soliciting or offering period (or lesser maximum period specified under applicable state law) for roll-up transactions.

Table of Contents

I. EXECUTIVE SUMMARY

Serious concerns have been raised about roll-ups in Congressional hearings⁴  and investor complaints to the Commission. These transactions include the combination or reorganization of two or more public or private limited partnerships or other similar entities, or the reorganization of a single partnership or similar entity into a new legal entity⁵  Investors in the partnerships usually receive an equity interest in the successor entity, which may be a limited partnership, an entity taxed as a real estate investment trust ("REIT") or a corporation. In most roll-ups, if a majority of the limited partners in a partnership approve the transaction, all investors in the partnership must exchange their partnership interests for interests in the successor.

The concerns expressed about roll-up transactions revolve around four principal areas. First, and foremost, critics have taken issue with the fundamental change in the nature of the investment forced upon limited partners who object to the roll-up but are bound by the vote of other limited partners. Most roll-ups change the partnerships from finite-life entities that hold assets for a limited period of time, distribute cash generated from operations to investors and then sell the assets and distribute proceeds to investors in connection with liquidation (generally referred to as "finite-life" partnerships), to longer-term entities that reinvest cash generated from operations and proceeds from the sale of assets in the business rather than distributing such cash or proceeds to investors (generally referred to as "reinvesting" or "inifinite-life" partnerships). The adverse effects of this change are exacerbated by the illiquid market for most limited partnership interests. Objecting limited partners have little alternative to being rolled-up.

Second, critics have questioned the fundamental fairness of the terms of roll-ups and the lack of arm's-length negotiations in structuring roll-ups. Roll-ups frequently result in increased compensation for roll-up sponsors, the receipt of substantial payments or securities by general partners, reduced cash distributions for investors, the imposition of super-majority voting requirements to remove management and the receipt by investors of securities that trade at a substantial discount in the securities market. Nor are appraisal rights commonly provided.

Third, objections have been raised about the uncertainties involved in combining numerous partnerships, the differing effects on investors in the various partnerships, and the valuation and allocation methods used to divide the securities of the successor amongst the partnerships.

Finally, investors have complained that informed decision making is hampered by the nature of the disclosure documents and brevity of the solicitation period. They say that roll-up disclosure documents, inherently complex given the nature of the transaction, often are substantially longer than necessary, and obtuse to the point of obfuscation. In addition, given the complexities of the transaction, investors find the solicitation period too short to make an informed decision.

In response to the concerns described above, the Commission has taken a number of actions, including the issuance of a release providing interpretive guidance of the existing disclosure requirements applicable to roll-up transactions.⁶  The Interpretive Release reiterates the requirements for clear, concise and comprehensible disclosure, and the need to highlight the potential risks and adverse effects of roll-ups. As stated in the Interpretive Release, a registrant that fails to file a registration statement reflecting a good faith effort to provide clear, concise comprehensible disclosure to investors will be advised that the filing will not be processed until the document is amended to do so. The Commission is adopting new rules today to improve further the disclosure required in connection with roll-up transactions.⁷

The rules adopted today address the four principal concerns expressed about roll-up transactions through enhanced disclosure requirements⁸  and extension of the solicitation period. The rules apply to roll-ups of limited partnerships and similar entities, and the rules, as well as this release, refer to such entities as "limited partnerships" or "partnerships." First, the new rules require specific disclosure with respect to risks, changes and effects of the transaction, such as changes in the expected term of existence of the partnership and the partnership's business plan, decreased cash distributions, reduced investor voting rights and increased management compensation. Second, heightened disclosure is required with respect to conflicts of interest, alternatives, valuation methods and fairness. Third, the rules require additional pro forma financial statements to highlight the effects of a partial roll-up and separate prospectus supplements summarizing the effects of the roll-up on investors in each partnership and providing more detailed disclosure with respect to valuation of the partnership's assets and allocation of the roll-up consideration to its limited partners. Finally, the rules require roll-up sponsors to distribute roll-up disclosure documents to investors at least 60 calendar days in advance of the proposed action, or, if shorter, the maximum period permitted under state law.

The rules adopted today are substantially the same as those proposed, with three principal revisions. First, the definition of roll-up transaction has been more precisely tailored to target those transactions that raise the concerns addressed by the rules. Under the revised definition,⁹  a "roll-up transaction" includes a combination or reorganization of two or more finite-life limited partnerships or other finite-life entities, or a reorganization of a single finite-life limited partnership or other finite-life entity into a new entity. Transactions involving the roll-up or reorganization of infinite-life or reinvesting entities, substantially similar to ordinary operating businesses, have been excluded from the definition. In addition, the rules include a provision permitting a sponsor of a transaction that is subject to the rules, but does not raise the concerns addressed by the rules, to apply to the Commission for an exemption for the transaction.

Second, in response to comments asserting limited utility and inordinate costs, the proposal to require multiple pro forma financial statements in each partnership supplement has not been adopted.¹⁰  Instead, additional pro forma financial statements based on the partial roll-up combination that produces the least cash flow will be required in the principal disclosure document and textual disclosure of the financial effects of this partial roll-up combination on each particular partnership will be required in the supplement relating to that entity.

Third, the proposed property appraisal and partnership-specific information requirements have been streamlined in response to concerns that the proposed requirements would result in voluminous disclosures without enhancing the quality of the information provided to investors. These and other changes in the rules as adopted are discussed below.

II. BACKGROUND AND PURPOSES OF THE ROLL-UP RULES

A. Background of Limited Partnerships and Roll-ups

Limited partnership interests have been offered to investors as a means to participate in the ownership of real estate, oil and gas properties, equipment or other types of assets. Investors usually purchase such interests with the expectation that the partnership will purchase assets, operate the assets for a limited period of time, in many cases make regular cash distributions to investors, and then sell the assets and distribute the proceeds to investors in connection with liquidation. Such limited partnerships typically are not authorized or expected to reinvest cash from operations or proceeds obtained from the sale of assets in assets owned or to be owned by the partnership. Although limited partnership interests often are offered in public, registered offerings and are transferable, for tax and other reasons there usually is no significant public market for the interests. Rather, investors generally purchase the interests with the understanding that they represent illiquid investments.

The limited partnership usually pays the general partner or its affiliates compensation for forming the partnership and for acquiring, operating and selling the partnership's assets. Partnership agreements generally provide for the distribution of proceeds from the sale of assets and cash from operations in accordance with the investors' interests (both limited and general partner interests) in the partnership. However, once investors receive specified minimum returns (often called "preferred returns"), the general partner often is entitled to receive a portion of the proceeds of asset sales or cash from operations greater than its interest in the partnership (often referred to as the general partner's "subordinated return" or "back-end interest").

Recessionary conditions in the real estate and oil and gas markets and changes in the tax laws have caused many limited partnerships and limited partnership sponsors to experience financial difficulties. These factors also have led to a significant reduction in the number and dollar amount of new limited partnership offerings.

At the same time, many limited partnership sponsors have proposed combinations of partnerships they have sponsored. The combined entities are expected to exist for a substantially longer period of time than the partnerships. The new entities will reinvest cash generated from operations and proceeds received from the sale of assets in new assets or in the improvement of existing assets, instead of making distributions to investors. Securities of the new entity, which are received by investors in exchange for their partnership interests, usually are listed for trading on a national securities exchange or traded in the NASDAQ system. Partnership sponsors proposing roll-ups generally state that the transactions should benefit investors for a variety of reasons, such as increased diversification of assets, increased liquidity for investors, increased access to capital sources and lower administrative costs.

B. Concerns Addressed by the Rules

1. Fundamental Changes and Adverse Effects

Serious objections have been raised about the fundamental changes in the nature of an investment that result from roll-ups. Many of the fundamental changes, adverse effects for investors and benefits for sponsors brought about by roll-ups are related to the change in the nature of partnerships from finite-life entities to reinvesting entities.

When a roll-up changes the cash distribution policy to permit reinvestment of cash generated from operations or proceeds from the sale of properties, investors generally must look to the securities markets for investment returns. However, securities issued in roll-up transactions frequently trade at a substantial discount from the value of the successor's assets. This may result in investors receiving lower returns from their investment than they would receive if the partnerships were left unchanged.

Increases in management compensation following many roll-ups also are related to the change from finite-life. The compensation arrangements in effect prior to a roll-up generally are based on the assumption that assets will be purchased, operated and sold over a limited period of time. When a partnership will be operated on a longer-term basis following a roll-up, partnership sponsors often change the compensation arrangements to provide for a "net asset value" or similar fee tied to the value of the partnership's assets, which will be paid for a substantially longer period of time. In addition, in many cases, property acquisition or disposition fees continue to be paid, but the amount of such fees paid by the partnership will increase as a result of the partnership's new policy of continuously selling properties and purchasing new properties. These changes reduce the amount of cash available for distribution to investors or for investment in new properties.

Roll-ups also may change the general partner's interest in the partnerships to eliminate its subordinated nature. The terms of some roll-ups provide that the general partner will receive securities of the successor, or cash or other consideration, in exchange for its subordinated interest at the time of the roll-up. In many cases, however, the general partner would not otherwise be entitled to these subordinated payments because limited partners have not yet received their minimum returns. In addition, net asset value or similar fees payable by the successor typically are not subordinated to minimum investor returns. These changes not only increase compensation to management, but also may diminish the general partner's incentive to generate maximum returns for investors.

Another fundamental change made in roll-ups, the imposition of a super-majority voting requirement to remove management or to engage in certain business combinations, also is related, in part, to the change from finite-life. As a publicly-traded entity after the roll-up, management of a successor faces a more substantial risk of an unwanted proxy contest or takeover. Consequently, roll-up sponsors frequently include provisions in the governing instruments of the successor, such as super-majority voting and other requirements, that make such actions more difficult.

Under the new rules, each of the fundamental changes brought about by a roll-up transaction will be highlighted to insure that investors have clear and full disclosure of the changes and the consequent risks and adverse effects of such changes.

2. Conflicts of Interest and Fairness

In most roll-up transactions, the general partner of the partnerships proposed to be combined determines the terms of the transaction, including the allocation of securities of the successor among the partnerships, the consideration to be paid to the general partner for its interests, the compensation to be paid to the general partner or its affiliates in the future and the voting and other rights of investors in the successor. The potential for conflict between the interests of the general partner and the limited partners in structuring the roll-up is considerable.

Roll-ups proposed by unaffiliated parties also may involve significant conflicts of interest. In a transaction in which an unaffiliated party proposes to acquire partnerships in exchange for interests in a newly-formed successor, for example, the general partner may negotiate both the sale of its interest to the unaffiliated party and the terms upon which the unaffiliated party will acquire the limited partners' interests.

Despite these serious conflicts of interest, most roll-ups are not structured to provide safeguards, traditional in the corporate context, such as independent representation of limited partners, to insure that their interests are fairly considered. Where fairness opinions are obtained from financial advisors, the scope of the opinions may be so limited that they may have no application to the roll-up as it is eventually completed. Frequently, a fairness opinion in a multiple-partnership roll-up does not address the fairness of each combination of partnerships that may result; for example, the opinion may be based only on the participation of all partnerships or a majority. Where possible partial roll-up combinations that may occur are not covered by the fairness opinion, investors may be misled.

The rules adopted today require enhanced disclosure, comparable to that required in going private transactions subject to Rule 13e-3,¹¹  of the conflicts of interest and the general partner's beliefs concerning the fairness of the roll-up, as well as the bases for such beliefs.

3. Combinations of Multiple Partnerships

A roll-up of multiple entities presents several important concerns. First, where there are differences among the partnerships, the roll-up may have different effects on investors in the partnerships. It may be difficult for an investor to comprehend the effects of the roll-up on him or her when the effects on all of the partnerships are discussed together.

Second, securities of the roll-up successor must be allocated among the limited partners based on the comparative valuation of the participating partnerships. This requires a valuation of each partnership, and then the application of a formula to allocate the securities. In a roll-up with numerous entities, this process is quite complex. Investors in each partnership evaluating the fairness of the allocation require information about how their partnership was valued, as well as information from which to judge whether the valuation and allocation methods have been applied to all of the partnerships in a fair and uniform manner.

Third, if the roll-up is structured to permit completion with less than all partnerships (as is often the case), serious uncertainties may be present. Investors deciding whether to approve the roll-up are faced with making an investment decision without knowing which partnerships will be combined to form the successor. Depending on which partnerships participate, the assets, liabilities and cash flow of the successor may be quite different, particularly if there are significant differences among the partnerships proposed to be combined.

The rules adopted today contain several provisions, including the requirement of a partnership specific supplement, designed to address these disclosure concerns raised by multiple entity transactions.

4. Complex Disclosure and Time Constraints

Investors and commenters have complained that, even if roll-up disclosure documents contain all relevant information, the disclosure is difficult to understand because of the length and complexity of the documents. Current Commission rules require disclosure to be presented in a clear, concise and comprehensible manner.¹²  The Interpretive Release emphasizes this requirement, and provides specific guidance concerning the manner in which roll-up documents must be written. The rules adopted today further the goal of obtaining understandable disclosure through the separate prospectus supplements noted above and through a specific direction to include a clear, concise and understandable summary addressing specific concerns raised by roll-ups. Finally, to insure that investors have sufficient time to consider the disclosure provided in roll-ups, the rules adotped today impose a minimum 60-calendar day solicitation or offering period, or, if shorter, the maximum period permitted under applicable state law.

III. TRANSACTIONS SUBJECT TO THE ROLL-UP RULES

A. General

The disclosure requirements set forth in new subpart 900 of Regulation S-K¹³  and the minimum solicitation or offering period¹⁴  apply to any "roll-up transaction" as defined in the rules.¹⁵  The definition of roll-up transaction and other related definitions adopted today have been revised from those proposed to limit the application of the new rules to those transactions that are likely to involve the principal concerns addressed by the rules. In addition, the rules have been revised to include a provision pursuant to which a sponsor of a transaction that comes within the roll-up rules, but does not raise the concerns addressed by the rules, will be permitted to apply to the Commission for an exemption.

B. Combinations of Limited Partnerships

Combinations of two or more finite-life limited partnerships have generated the concerns and controversy associated with roll-ups described above. Therefore, the rules as adopted apply to a transaction or series of transactions that directly or indirectly, through acquisition or otherwise, involves a combination or reorganization of two or more finite-life limited partnerships or other finite-life entities, provided securities of a successor entity will be issued in connection with the transaction. Such a transaction may be structured in a variety of ways, such as a merger of the limited partnerships into a successor entity (whether newly-formed or previously existing),¹⁶  in which limited partners receive securities of the successor entity in exchange for their limited partnership interests, or as an exchange offer in which the limited partnerships are acquired by a successor entity through the issuance of securities of the successor in exchange for limited partnerships interests. In the latter case, the transaction would come within the rules whether or not the partnerships are merged into the successor entity.¹⁷

The rules apply whether the roll-up is proposed by an affiliate or a non-affiliate. Transactions proposed by non-affiliates have involved the fundamental changes associated with roll-ups when the transactions involve finite-life entities. In addition, as discussed above, "unaffiliated" roll-ups may raise serious conflicts of interest and fairness concerns as a result of the general partner's involvement in the negotiations of the sale of both its interests and those of the limited partners.

The rules as adopted have been revised to cover only transactions involving "finite-life" limited partnerships and other "finite-life" entities.¹⁸  A partnership is "finite-life" if it (1) operates as a conduit vehicle for investors to participate in the ownership of assets for a limited period of time, and (2) has as a policy or purpose distributing to investors cash from operations or proceeds from the sale, financing or refinancing of assets, rather than reinvesting such cash or proceeds in the business.¹⁹  The question of whether a particular partnership is "finite-life" will depend upon an examination of the partnership's purposes and is not subject to any numerical tests.

Transactions involving combinations of reinvesting limited partnerships are not subject to the rules as adopted, since such partnerships are closely akin to ordinary operating businesses. Business combinations involving such reinvesting partnerships have not been subject to the criticisms associated with roll-ups. Investors in such partnerships, like investors in other operating businesses, have no expectation that the partnership will distribute its cash from operations or sell its assets and distribute the proceeds to investors. Moreover, since many of the other fundamental changes associated with roll-ups, such as changes in management compensation and investor voting rights, are related to the change from finite-life, roll-ups of reinvesting limited partnerships should not involve such changes. In the event that a combination of reinvesting limited partnerships involves some of the concerns addressed by the new rules, such as differing effects on investors and valuation and allocation complexities, sponsors of such transactions should consider the disclosures required under the new rules in connection with the anti-fraud provisions of the Federal securities laws.²⁰

C. Single Partnership Reorganizations

As with the proposal, the rules as adopted apply to a reorganization of a single limited partnership in which securities of a successor entity will be issued in exchange for the limited partnership interests, such as converting a limited partnership into a corporation or an entity taxed as a REIT. Such transactions often include changing a finite-life partnership to a reinvesting entity and, therefore, raise many of the serious concerns associated with roll-ups of multiple limited partnerships.

The rules apply to a reorganization of a single, finite-life partnership whether proposed by an affiliate or a non-affiliate. For the reasons noted above with respect to combinations of two or more partnerships proposed by non-affiliates, reorganizations of single, finite-life limited partnerships proposed by non-affiliates may raise many of the concerns addressed in the rules.

The rules as adopted do not apply to reorganizations of single, reinvesting limited partnerships. As is the case with combinations of such entities, reorganizations of such entities should not raise the concerns addressed by the rules.

The rules have not been revised to include amendments to the governing instruments of a limited partnership that do not involve the issuance of securities of a successor entity. However, to the extent that such proposals raise concerns addressed by the roll-up rules, the disclosures required under the rules should be considered from an anti-fraud perspective.

D. Transactions Involving Other Finite-life Entities

The rules apply to combinations or reorganizations of entities that are substantially similar to finite-life limited partnerships.²¹  As with limited partnerships, a REIT or business trust or another entity as a "finite-life entity" subject to the new rules, if it (1) operates as a conduit vehicle for investors to partcipate in the ownership of assets for a limited period of time, and (2) has as a policy or purpose distributing to investors cash from operations or proceeds from the sale, financing or refinancing of assets, rather than reinvesting such cash or proceeds in the business.²²  From an investor's point of view, such an entity is substantially similar to a finite-life limited partnership. As a result of the change in the definition, some REITs and business trusts will be subject to the rules, and others will not.²³

The rules as adopted also have been revised to clarify that transactions involving entities registered as investment companies under the Investment Company Act of 1940 (the "1940 Act")²⁴  are not subject to the rules.²⁵  Transactions involving such entities are subject to extensive regulation under the 1940 Act, and the concerns associated with roll-ups have not been preceived in this area.

E. Exemption Upon Application

The Commission recognizes that there may be specific transactions subject to the rules adopted today that will not raise the concerns addressed by the new requirements, and where the public interest and investor protection would not require such disclosures. The question of whether such a transaction should be subject to the rules would depend upon all of the circumstances of the proposed transaction. The rules as adopted permit a sponsor of a transaction that does not raise the concerns addressed by the rules to apply to the Commission for an exemption from the application of the rules.²⁶

IV. REQUIREMENTS FOR ROLL-UP TRANSACTIONS

A. General

Roll-up sponsors preparing documents to be filed with the Commission must comply with the disclosure requirements in the new rules, and must present the information in a clear, concise and understandable manner as required by the Commission's rules²⁷  and the Interpretive Release.²⁸  The disclosure must be written in a "plain English," direct fashion that will enable investors to easily comprehend the substance of the disclosure and understand the importance of the disclosures.²⁹  The disclosure guidance provided by the Interpretive Release applies fully to the disclosure called for by the new rules as well as existing requirements.

B. Fundamental Changes Causing Adverse Effects for Investors and Benefits for Management

1. Risk Factors and Other Considerations

The new rules call for specific information about the risks and effects of roll-up transactions.³⁰  The risks and effects of the roll-up must be identified briefly in the forepart of the summary³¹  and described in detail in a separate risk factors section immediately following the summary.³²

The summary and the risk factors requirement each list factors that generally will be of significance. The factors listed are not exclusive; the summary and risk factors section are required to disclose all material risks and effects of the transaction. In discussing the risks and effects specific to the transaction, the heightening of one risk or effect by the presence of other risks or effects of the transaction or investment should be clearly stated and explained.³³

The risks and effects of the roll-up on investors in each partnership must be described.³⁴  However, to the extent that the risks and effects are substantially the same for investors in various partnerships, the information may be presented on a combined basis.

2. Comparative Information

The new rules require specific, detailed information about significant business terms and policies and rights and obligations of managers and the investors of the successor and a comparison of those business terms and policies, rights and obligations to those of the limited partnerships. The rule lists specific items that must be addressed, including voting rights, management compensation, business plan, borrowing and cash distribution policies. The list is not exclusive; disclosure is required concerning any other similar matters material to an understanding of the changes caused by the roll-up.³⁵  This item has been adopted substantially as proposed.³⁶

The various comparative tables required under the new rules will be required to be included in the detailed discussion of the particular subject matter in the disclosure documents.³⁷  For example, the comparative presentation of compensation before and after the roll-up would be included with the detailed description of the compensation arangements to be in effect after the roll-up.³⁸  The comparative presentations would be required to be specifically crossed-referenced in the risk and effect disclosure.

3. Federal Income Tax Consequences

Roll-ups typically change substantially the tax treatment of the investment. In addition, the roll-up transaction itself may have adverse tax consequences for investors. However, the complex tax disclosure often included in roll-up documents may not be useful for investors. To address these concerns, the rules as adopted include a specific requirement to provide a brief, clear and understandable summary of the material Federal income tax consequences of the roll-up transaction and an investment in the successor.³⁹  If any of the material Federal income tax consequences are reasonably expected to be different for different partnerships' investors, the differences must be described. Where a tax opinion has been provided, the substance of the opinion should be briefly summarized, including identification of those material consequences as to which counsel has not been asked, or is unable, to opine. Repeating the "long form" tax opinion in the disclosure document would not satisfy the summary of the opinion requirement. The entire opinion of counsel would be filed as an exhibit to the registration statement, and required to be made available to investors upon request, or included as an appendix to the prospectus.⁴⁰

As proposed, the tax disclosure item required to table showing the expected tax liabilities arising from the roll-up for investors in each partnership, if any of the partnerships were expected to incur such liabilities. In light of concerns expressed by commenters about the potentially signficant differences in the tax profiles of investors, the requirement to provide an expected tax liabilities table has not been included in the rules as adopted. However, because expected tax liabilities would be an important consideration to investors deciding whether to participate in a roll-up, information that will provide investors an understanding of the general magnitude of the expected tax liabilities should be provided in the disclosure document.⁴¹

C. Conflicts of Interest and Fairness

1. Conflicts of Interest

The conflicts of interest item requires a brief description of the general partner's fiduciary duties to investors in each partnership and any potential material conflict of interest between the general partner and such investors relating to the roll-up transaction.⁴²  This item also requires specific information about any person that has been retained to represent the interests of investors in connection with the roll-up. If no such representative has been retained, that must be disclosed, together with the general partner's reasons for not retaining a representative and the risks to limited partners arising from the absence of separate representation.⁴³

As adopted, the rules do not include a requirement included in the proposed rules for the general partner to state whether or not it reasonably believed it had satisfied its fiduciary duties in connection with the roll-up. Upon consideration, the Commission believes that the central issue is the fairness, both procedural and substantive, of the transaction for investors. The new rules require the sponsor's belief as to the fairness of the transaction to investors, and the underlying bases for such belief.

2. Background of, Reasons for and Alternatives to the Roll-up Transaction

The new rules require specific information about the background of the roll-up transaction,⁴⁴  the sponsor's reasons for proposing the transaction (including its reasons for proposing the particular structure selected)⁴⁵  and alternatives to the roll-up considered by the general partner or available to investors.⁴⁶  With the exceptions noted below, these requirements have been adopted without substantial revision.

To assist investors in considering whether opportunities other than the proposed roll-up might be available or have been considered and rejected by the general partner, the rules require disclosure of any discussions between the general partner and its affiliates and third parties (or any of their advisors) concerning specified transactions involving any of the partnerships or their assets within the previous two years, such as mergers, consolidations or acquisitions involving such partnerships.⁴⁷  This disclosure requirement is based on a similar requirement in Schedule 13E-3⁴⁸  and is to be interpreted in the same manner.⁴⁹

The rules require a description of the alternatives to the roll-up considered by the general partner and the reasons for the general partner's rejection of each alternative.⁵⁰  In addition, the possibility and results of continuing the partnerships in accordance with their business plans must be described even if the general partner did not consider that possibility.⁵¹  This disclosure item also requires a description of the potential for, and results of, an orderly liquidation of the partnerships, whether or not considered by the general partner.⁵²

3. Fairness

The new rules require disclosure of the general partner's beliefs concerning the fairness of the roll-up transactionj and the bases for such beliefs. This fairness item is comparable to the fairness item in Schedule 13E-3 for going private transactions⁵³  and will be interpreted in a similar manner. In addition, the fairness item for roll-up transactions has been supplemented to address concerns specific to roll-ups, such as the uncertainties and differing effects arising from combinations of multiple partnerships and the change in business plan resulting from going from a finite-life partnership to a reinvesting entity.

The new disclosure rules require the general partner to state whether or not it reasonably believes the roll-up is fair or unfair to investors in each partnership.⁵⁴  This statement must address the fairness of all possible combinations of partnerships if the roll-up may be completed on a partial basis.⁵⁵  A fairness statement that did not apply to the transaction as it is eventually completed would not satisfy the purposes of this disclosure requirement.⁵⁶

In order to insure that investors have adequate information upon which to assess the merits of the general partner's fairness determination, the rules require a discussion of matters, both procedural and substantive, considered by the general partner as a part of its fairness analysis.⁵⁷  For example, the rules require a discussion of the weight given to the form and amount of, and the methods used to determine, the consideration to be received by investors and the general partner, and the compensation to be paid to the sponsor in the future.⁵⁸  This discussion also must address the weight given to alternatives to the roll-up considered by the general partner.⁵⁹  In addition, the rules require the general partner to discuss the fairness of the roll-up in comparison to the possible alternatives of continuing the partnerships in accordance with their original business plans or liquidating the partnerships in an orderly fashion, even if those alternatives were not considered by the general partner.⁶⁰  The disclosure must describe any material differences among the partnerships relating to the fairness of the transaction.⁶¹

The rules do not mandate specific valuation methods to be used in connection with the discussion of the fairness of the roll-up compared to alternatives. Valuation methods likely will be determined consistent with state law fiduciary duties. However, the rules would not permit, as some have attempted, the general partner to present the disclosure in a manner that would lead investors to discount the information as totally unreliable. For example, it would not be appropriate for the disclosure to set forth possible liquidation values, coupled with disclosure to the effect that such values are merely theoretical and there is no reasonable likelihood that such values would be obtained in a liquidation.⁶²

Finally, the rules require a description of the weight given by the general partner in the fairness analysis to any reports, opinions or appraisals obtained from third parties, together with a description of any material uncertainties known to the general partner that have affected or are reasonably likely to affect the conclusions in such documents.⁶³  Where, for example, the general partner's fairness analysis is based, in whole or part, on a fairness opinion that does not address the fairness of all possible combinations of partnerships, prominent disclosure of the limited scope of the opinion would be required to enable investors to evaluate whether reliance upon such an opinion is appropriate. Similarly, disclosure would be required if the general partner relied upon appraisals in the fairness analysis and the general partner is aware that events subsequent to the date of the appraisals may have affected the appraiser's conclusions.

4. Reports, Opinions and Appraisals

a. General Requirements

All reports, opinions and appraisals obtained from outside parties that are materially related to the roll-up transaction must be identified and summarized in the disclosure document.⁶⁴  This disclosure item calls for the information required under the comparable item in Schedule 13E-3,⁶⁵  as well as additional information specifically related to the concerns associated with roll-up transactions.

The disclosure document must state that copies of the reports, opinions and appraisals described in the disclosure document will be provided without charge promptly upon written request of an investor or his representative.⁶⁶  In addition, the reports, opinions and appraisals must be filed with the Commission as exhibits to the registration statement.⁶⁷  With the exception of the revisions to the appraisal disclosure requirements discussed below, this disclosure item has been adopted substantially as proposed.

b. Disclosure of "Opinion Shopping"

To provide disclosure of opinion shopping that could bear on the weight an investor might place on the opinions disclosed, the rules require the sponsor to disclose contacts with any person concerning a fairness opinion, valuation or report on the roll-up transaction, if such person's opinion, valuation or report is not filed as an exhibit to the document.⁶⁸  Under this item, the identity of the firm, the nature of the contact, any actions taken by the firm, and any views (preliminary or final) expressed on the proposed subject matter of the opinion, report or appraisal must be disclosed. Disclosure of all contacts is required pursuant to this item, whether formal or informal, and regardless of whether an agreement of retainer was reached with an outside party.

c. Fairness Opinions

The fairness opinion disclosure item requires the document to state whether the fairness opinion addresses the fairness of the roll-up for investors in each partnership and the fairness of all possible combinations of partnerships.⁶⁹  If all combinations are not addressed, the document must identify those combinations that are addressed and provide information about the bases for the selection.⁷⁰  In addition, if all combinations are not addressed, prominent disclosure is required to clearly alert investors to the limited scope of the fairness opinion. Where materially limited, great care must be taken in the disclosure document to insure that investors are not misled to believe a fairness opinion has been obtained with respect to partial roll-up combinations not actually covered by the opinion.⁷¹

d. Appraisals

The rules as proposed required detailed information about each separate appraisal. Commenters questioned whether in roll-ups involving numerous separately appraised assets, the disclosures required under the proposed rules would be too voluminous to be of value to most investors considering the roll-up. In light of this concern and given the availability (without cost) of the appraisals to any interested investors upon request, the appraisal information item has been revised.⁷²  AS adopted, the item requires the disclosures document to provide basic information about the appraisals intended to facilitate an investor's understanding of the appraisal process. Specific tabular information about the appraisals of significant assets is required in an appendix to the disclosure document.

The basic information to be set forth in the disclosure document is to include:

A description of the purposes for which the appraisals were obtained and how the appraisals were used in connection with the roll-up;

A general description of the assets covered by the appraisals and disclosure of the aggregate appraised value of such assets (including such value net of associated indebtedness), together with a description of and valuation of assets subject to any material qualifications by the appraiser and a summary of such qualifications; and

Disclosure of the date of the appraisals, whether and in what circumstances the appraisals will be updated and whether any events have occurred or conditions have changed since the date of the appraisals that may have caused a material change in the value of the assets.⁷³

The appendix to the disclosure document must include specific information about the appraisal of any property or asset that is significant⁷⁴  to the partnership holding such property or asset. The appraised value of each such asset must be set forth, together with specific information about values under different valuation approaches considered by the appraiser and assumptions used by the appraiser.⁷⁵ .

5. Roll-up Expenses; Dissenters' Rights; Inspection Rights

The new rules also include other specific disclosure requirements intended to elicit information relevant to the fairness of the roll-up and alternatives available to investors. Specifically, the rules require information to be provided about expenses of the roll-up⁷⁶  and the sources and amount of funds used to finance the roll-up.⁷⁷  In addition, information must be provided about the availability of dissenters' appraisal or similar rights, investor access to partnership books and records or the services of an appraiser (including whether the sponsor will pay the expenses of the appraiser) and investors' rights under Federal and state law to obtain a list of the partnership's security holders.⁷⁸  Each of these provisions has been adopted substantially as proposed.

D. Combinations of Multiple Entities

1. Individual Partnership Supplements

When two or more entities are proposed to be included in a roll-up transaction, the new rules require the delivery of a separate prospectus supplement to investors in each entity.⁷⁹  The purposes of the separate supplement are twofold. First, the supplement, rather than being a summary of all important information about the roll-up transaction, is designed to highlight for investors in each partnership the risks, effects and fairness of the roll-up with respect to their own partnership. It is often difficult for an investor to comprehend the risks and effects applicable to him or her, when all of the effects are discussed together in one disclosure document. Therefore, the rule requires a brief description of each material risk and effect and a statement as to the general partner's views of the fairness of the roll-up transaction for investors in the partnership. This discussion in the supplement will highlight the disclosure relevant to a particular partnership that is contained in the principal disclosure document. The supplement must be written in direct, plain English, and include descriptive headings or "bullet" lists, followed by brief discussions.

Second, the supplement will provide additional detail bearing on the valuation of the particular partnership and its assets in the roll-up transaction. The supplement must provide detailed information about: (1) the valuation of the partnership for purposes of the allocation of the successor's securities in the roll-up; and (2) the compensation and cash distributions received by the general partner and its affiliates from the partnership during the previous three-year period and most recently completed interim period, together with a comparison of those amounts to the amounts that would have been paid if the compensation and distribution arrangement to be in effect after the roll up had been in effect after the roll-up had been in effect during each periods. this detailed information is not required to be reiterate in the principle disclosure document.⁸⁰

The rules have been revised to require the supplement to include information about cash distributions made to limited partners during the last five fiscal years and most recently completed interim period. Although this information also will be set forth in the selected financial information concerning each partnership included in the principal disclosure document, it is required to be shown separately in the supplements in light of its importance to an evaluation of the fairness of the roll-up to investors in a particular partnership.

The sponsor will be required to file all supplements with the Commission and must undertake to promptly provide upon written request (without cost) of a limited partner (or his or her representative), a copy of any supplement with respect to a roll-up.⁸¹  Thus, if, for example, a limited partner has an interest in assessing the detailed valuation of other partnerships, that partner may rquest the supplements applicable to other partnerships participating in the roll-up transaction.

Although the separate supplement requirement may impose additional costs on roll-up sponsors, the benefits to investors considering complex roll-up transactions warrant the additional expense. However, in order to address commenter concerns about the additional costs, the rule as adopted limits the information required about individual assets to those assets that are significant to the partnership.⁸²  In addition, in lieu of the pro forma statements and a discussion of the statements required under the proposed rule, the rule as adopted requires the supplement to refer the reader to the pro forma financial statements included in the principal disclosure document.⁸³  However, in order to insure that investors understand the financial impact of the transaction, the brief discussion of the risks and effects of the transaction included in the supplement must alert the investor to the successor's possible financial condition and results of operations after the roll-up if such condition or results may be significantly different from those of the partnership.⁸⁴

With the exception of the revisions discussed above, the supplement rule has been adopted substantially as proposed.⁸⁵  In light of the individual partnership valuation and compensation information required in the supplements, the rule has not been revised to permit combined supplements. A combined supplement would undermine the effectiveness of the supplement in highlighting the partnership-specific information, and could present the same complex disclosure problems currently present in many roll-up documents.

2. Allocation of Roll-up Consideration

The rules require the principal disclosure document to include a detailed description of, and a table showing, the method used to allocate securities and other consideration in the roll-up transaction to each of the partnerships.⁸⁶  Under this requirement, the value assigned to each significant category of assets of each partnership would be presented. For example, in a roll-up of several real estate programs, separate columns would be included for real estate net of mortgage debt, cash and cash equivalents, and net other assets.⁸⁷  In addition, detailed information about the method used to allocate securities or other consideration to the general partner is required.⁸⁸  The requirements of this item are intended to clarify the requirements currently set forth in Forms S-4 and F-4 to describe the terms of the roll-up transaction.⁸⁹  This item has been adopted substantially as proposed.

3. Financial Information

Specific pro forma and selected financial information is required under the rules.⁹⁰  The item requiring such information has been adopted without substantial revision.

The new rules require the inclusion of pro forma financial statements based on (at least) the following two assumptions: (1) participation by all partnerships, and (2) participation by those partnerships that on a combined basis have the lowest combined net cash provided by operating activities for the last fiscal year of the partnerships, provided such participation satisfies all conditions to completing the roll-up.⁹¹  The purpose of this requirement is to provide a means for investors to evaluate the possible financial condition of the successor if such a combination were to occur.⁹²  The pro forma financial information rule also requires the inclusion of pro forma statements of cash flow.⁹³

The selected financial data required by the new rules with respect to each partnership expands the current selected financial information requirements.⁹⁴  For example, information is required about cash held by the partnerships, total assets at both book value and and at the value assigned for purposes of the roll-up, net cash provided by operating activities and distributions.⁹⁵

4. Background of the Partnerships

The rules require roll-up disclosure documents to include basic information about the background of the partnerships proposed to be included in the roll-up transaction.⁹⁶  This requirement, which has been adopted substantially as proposed, is intended to address the concern that investors considering a multiple partnership roll-up may have little or no previous knowledge about all of the partnerships that are proposed to be combined with their own. The information required includes (for each partnership) the investment objective(s), the amount of capital raised from unaffiliated investors, the extent to which funds have been invested as planned, and the extent to which the partnership has achieved its investment objective(s). This information may be presented on a combined basis provided each partnership covered in the combined presentation is clearly identified and the information is presented in a clear and understandable manner.⁹⁷  However, separate disclosure is required with respect to recent or likely materially adverse financial developments involving the partnerships or the general partner and the effect the roll-up transaction will have on such developments.⁹⁸

Upon further consideration of the information required under the current rules, the proposed requirement to provide summary information concerning partnership properties and other assets has not been adopted.⁹⁹  Under the current requirements, information about the assets of each entity proposed to be included in a roll-up must be included in the registration statement, either directly or through incorporation by reference to filings made with the Commission.¹⁰⁰  This information is substantially the same as that which would be provided to investors if the partnership proposed to be included in the roll-up registered its securities for sale, and generally includes the information specified in the proposed summary information rule. Consequently, additional information is not necessary. However, in the event that a roll-up transaction includes numerous partnerships, care should be taken to insure that the information provided about partnership assets is presented in a manner that is clear and understandable for investors.

E. Solicitation Period

As discussed in the Proposing Release, investors and many in Congress have expressed concerns that investors have had insufficient time to read and understand the complex disclosure contained in roll-up documents and arrive at an informed decision regarding proposed roll-up transactions. Therefore, subject to the exception described below for shorter maximum periods under state law, the rules establish a minimum solicitation period of 60-calendar days prior to a limited partners' meeting at which a roll-up transaction will be submitted to a vote or 60 calendar days prior to the earliest date on which partnership action could be taken by consent.¹⁰¹  Similarly, if the roll-up transaction is an exchange offer subject to the Williams Act, a minimum 60-calendar day offering period is imposed.¹⁰²  If, however, under applicable state law, the maximum period permitted for giving notice is less than 60 calendar days, the state law maximum notice period will apply. The rules establishing the minimum period have been adopted substantially as proposed.¹⁰³  Where the state law does not preclude a 60-day solicitation period, the 60-day requirement will apply, notwithstanding any provision in the partnership agreement to the contrary.

V. COST-BENEFIT ANALYSIS

In the Proposing Release, the Commission requested commenters to provide views and data as to the costs and benefits associated with amending the disclosure requirements. No commenters specifically responded to this request, however, three commenters expressed concern that the costs of these transactions to sponsors and to the Commission staff would be significant.

The Commission believes that while some additional costs to registrants will result from the adoption for subpart 900 of Regulation S-K and the other revisions being made, such costs will be outweighed by the benefits resulting from the amended disclosure requirements which enhance the ability of securityholders to analyze limited partnership roll-up transactions. Subpart 900 of Regulation S-K and the other revisions have been formulated against the template of evolving state partnership law and will not subject additional persons to filing requirements.

VI. FINAL REGULATORY FLEXIBILITY ANALYSIS

A Final Regulatory Flexibility Analysis in accordance with 5 U.S.C. 604 has been prepared regarding the new rules described in this release. Members of the public who wish to obtain a copy of the Final Regulatory Analysis should contact Michael L. Hermsen, Special Counsel, Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop 7-6, Washington, D.C. 20549 (202) 272-2573. The summary of the Initial Regulatory Flexibility Analysis appears at 56 FR 28971 (Securities Act Release No. 6899).

VII. EFFECTIVE DATE

The disclosure and other requirements relating to roll-up transactions are effective on October 30, 1991, in accordance with the Administrative Procedures Act, which allows for effectiveness in less than 30 days after publication, inter alia, "as provided by the agency for good cause found and published with the rule." 5 U.S.C. 553(d)(3). It is necessary for the disclosure and other requirements relating to roll-up transactions to become effective immediately in order to address effectively and comprehensively the serious investor protection concerns described in this release regarding roll-up transactions. Based on the Commission's experience in reviewing documents of this type, and review of pending documents, it appears that investors could be deprived of the protections provided by the new rules, although receiving disclosure documents a significant period of time after adoption of the requirements. Immediate effectiveness will prevent delays in applicability of the requirements, prevent circumvention of the requirements and assure that all investors who are asked to participate in roll-up transactions from the time the rules are adopted receive comparable and concise disclosure.

VIII. STATUTORY BASIS

The amendment to Regulation S-X is being adopted pursuant to Sections 6, 7, 8, 10, 19 and Schedule A of the Securities Act of 1933, as amended [15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77aa]; Sections 12, 13, 14, 15 and 23 of the Securities Exchange Act of 1934, as amended [15 U.S.C. 78l, 78m, 78n, 78o, 78w]; and Sections 5, 14 and 20 of the Public Utility Holding Company Act of 1935, as amended [15 U.S.C. 79e, 79n 79t].

The amendments to Regulation S-K and Forms S-4 and F-4 are being adopted pursuant to Sections 6, 7, 8, 10 and 19 of the Securities Act of 1933, as amended [15 U.S.C. 77f, 77g, 77h, 77j, 77s].

The amendments to Rule 14a-6, Rule 14c-2 and Rule 14e-1 are being adopted pursuant to Sections 14(a), 14(c), 14(e) and 23(a) of the Securities Exchange Act of 1934, as amended [15 U.S.C. 78n(a), 78n(c), 78n(e), 78w(a)].

List of Subjects in 17 CFR Parts 210, 229, 239 and 240.

Accounting, Reporting and Recordkeeping requirements, Securities.

IX. TEXT OF AMENDMENTS

In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations is amended as follows:

PART 210 FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT COMPANY ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975.

1. The authority citation for Part 210 is revised to read as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77aa(25), 77aa(26), 78l, 78m, 78n, 78o, 78w(a), 79e(a)(b), 79n, 79t, 80a-8, 80a-20, 80a-29, 80a-30, 80a-37, unless otherwise noted.

2. By amending §210.11-01(a) to redesignate subparagraphs (6) and (7) as subparagraphs (7) and (8) and to add new subparagraph (6) to read as follows:

§210.11-01(a)

(6) Pro forma financial information required by §229.914 is required to be provided in connection with a roll-up transaction as defined in §229.901(c).

PART 229 STANDARD INSTRUCTIONS FOR FILING FORMS UNDER THE SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND CONSERVATION ACT OF 1975 REGULATION S-K.

3. The authority citation for Part 229 continues to read as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss, 781, 78m, 78bn, 78o, 78w, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted.

4. By amending Part 229 to add a new Subpart 229.900, to read as follows: * * * [Text omitted].

PART 239 FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

5. The authority citation for Part 239 continues to read, in part, as follows:

Authority: 15 U.S.C. 77a, et seq., unless otherwise noted.

6. By amending Form S-4  by adding General Instruction I to read as follows:

NOTE: Form S-4 does not appear in the Code of Federal Regulations.

Form S-4

General Instructions

I. Roll-Up Transactions.

1. If securities to be registered on this Form will be issued in a roll-up transaction as defined in Item 901(c) of Regulation S-K , then the disclosure provisions of Subpart 229.900 of Regulation S-K shall apply to the transaction in addition to the provisions of this Form. To the extent that the disclosure requirements of Subpart 229.900 are inconsistent with the disclosure requirements of any other applicable forms or schedules, the requirements of Subpart 229.900 are controlling.

2. If securities to be registered on this Form will be issued in a roll-up transaction as defined in Item 901(c) of Regulation S-K ), the prospectus must be distributed to security holders no later than the lesser of 60 calendar days prior to the date on which action is to be taken or the maximum number of days permitted for giving notice under applicable state law.

7. By amending Form F-4  by adding General Instruction G to read as follows:

NOTE: Form F-4 does not appear in the Code of Federal Regulations.

Form F-4

General Instructions

G. Roll-Up Transactions.

1. If securities to be registered on this Form will be issued in a roll-up transation as defined in Item 901(c) of Regulation S-K, then the disclosure provisions of Subpart 229.900 of Regulation S-K shall apply to the transaction in addition to the provisions of this Form. To the extent that the disclosure requirements of Subpart 229.900 are inconsistent with the disclosure requirements of any other applicable forms or schedules, the requirements of Subpart 229.900 are controlling.

2. If securities to be registered on this Form will be issued in a roll-up transaction as defined in Item 901(c) of Regulation S-K, the prospectus must be distributed to security holders no later than the lesser of 60 calendar days prior to the date on which action is to be taken or the maximum number of days permitted for giving notice under applicable state law.

PART 240 GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

8. The authority citation for Part 240 continues to read, in part, as follows:

Authority: 15 U.S.C. 77c, 77d, 77s, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 78s, 78w, 78x, 79q, 79t, 80a-29, 80a-37, unless otherwise noted.

9. By amending §240.14a-6  by adding new paragraph (m) to read as follows:

§240.14a-6 Filing requirements.

(m) Roll-up transactions. If a transaction is a roll-up transaction as defined in Item 901(c) of Regulation S-K  and is registered (or authorized to be registered) on Form S-4 or Form F-4, the proxy statement of the sponsor or the general partner as defined in Item 901(d) and Item 901(a), respectively, of Regulation S-K  must be distributed to security holders no later than the lesser of 60 calendar days prior to the date on which the meeting of security holders is held or action is taken, or the maximum number of days permitted for giving notice under applicable state law.

10. By amending §240.14c-2 by adding new paragraph (c) to read as follows:

§240.14c-2 Distribution of information statement.

(c) If a transaction is a roll-up transaction as defined in Item 901(c) of Regulation S-K and is registered (or authorized to be registered) on Form S-4  or Form F-4, the information statement must be distributed to security holders no later than the lesser of 60 calendar days prior to the date on which the meeting of security holders is held or action is taken, or the maximum number of days permitted for giving notice under applicable state law.

11. By amending §240.14e-1 by revising paragraph (a) to read as follows:

§240.14e-1 Unlawful tender offer practices.

(a) Hold such tender offer open for less than twenty business days from the date such tender offer is first published or sent to security holders; provided, however, that if the tender offer involves a roll-up transaction as defined in Item 901(c) of Regulation S-K and the securities being offered are registered (or authorized to be registered) on Form S-4 or Form F-4, the offer shall not be open for less than sixty calendar days from the date the tender offer is first published or sent to security holders;

By the Commission.

¹ 17 CFR 229.900 et seq.

² 17 CFR 239.25 and  17 CFR 239.34; 15 U.S.C. 77a et seq.

³  17 CFR 210.11.

⁴ See e.g., Written Testimony of Richard C. Wollack, Chairman of Liquidity Fund Management, Inc., Before the Subcommittee on Securities of the Committee on Banking, Housing and Urban Affairs, United States Senate at 10 (February 27, 1991) and Written Testimony of Michael Joseph Connolly, Secretary of State, Commonwealth of Massachusetts, Before the Subcommittee on Telecommunications and Finance of the Committee on Energy and Commerce, United States House of Representatives at 1 (April 23, 1991).

⁵ For a detailed discussion of transactions subject to the rules, see Part III below.

⁶ See Release No. 33-6900 (June 17, 1991) [56 FR 28979 (June 25, 1991)] (the "Interpretive Release").

⁷ The rules were proposed for comment in Release No. 33-6899 (June 17, 1991) [56 FR 289062 (June 25, 1991)], (the "Proposing Release").

The Proposing Release elicited 18 letters from 17 commenters; these letters, as well as the comment summary prepared by the staff, are available for public inspection and copying at the Commission's Public Reference Room (see File No. S7-21-91).

⁸ The rules adopted today include new disclosure requirements and codify interpretive positions of existing disclosure requirements.

⁹ Item 901.

¹⁰ Proposed Item 902(a)(6).

¹¹  17 CFR 240.13e-3.

¹² See Rule 421(b) of Regulation C.

¹³ 17 CFR 229.900 et seq.

¹⁴ See General Instruction I.2 of Form S-4; General Instruction G.4 of Form F-4, Rules 14a-6(m), 14c-2(c) and 14e-1(a)(m), 14c-2(c) and 14e-1(a)).

¹⁵ Item 901(c). The disclosure requirements apply to registration statements on Form S-4 or Form F-4, the forms generally used in connection with business combinations or reorganizations. If securities to be issued in a roll-up transaction are registered on another form, such as Form S-1 or Form S-11, but would be authorized to be registered on Form S-4 or Form F-4, the roll-up rules will apply in that context.

¹⁶ The definition of "roll-up transaction" in Item 901(c) has been revised to clarify that the successor entity need not be newly formed.

¹⁷ The definition in Item 901(c) has been revised to clarify that a combination or reorganization accomplished indirectly through an acquisition transaction is included.

¹⁸ If a combination or reorganization transaction includes a finite-life partnership and any other entities, the requirements apply to each entity proposed to be included in the roll-up transaction, whether or not the entity is a "partnership" as defined in Item 901(b). See Instruction to Item 901.

¹⁹ See Item 901(b)(2). A partnership would be considered "finite-life" under the definition even if the partnership's governing instruments permitted the reinvestment of cash from operations or proceeds received from the sale of assets or did not explicitly address the point, if the partnership's policies or purposes included that such cash would be distributed to investors and would not be reinvested in the business, as evidenced by such matters as the partnership's offering materials or reports filed with the Commission or sent to investors. In addition, a partnership would be "finite-life" if it were permitted to reinvest cash from operations or proceeds received from the sale of assets during a limited period of time, if, after such initial period, the partnership's purposes or policies would call for the distribution of such cash.

²⁰ See, e.g., Section 17(a) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. 77q(a); Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. 78j(b), and Rule 10b-5 thereunder. See also Rule 408 under the Securities Act, and Rule 12b-20 under the Exchange Act.

²¹ Such entities are included in the definition of the term "partnership" set forth in Item 901(b).

²² Item 901(b)(2).

²³ A REIT that is required to distribute net income to investors in accordance with the Federal tax laws applicable to REITs will not be a "finite life" entity under the rules if its policies or purposes do not include that proceeds from the sale, financing or refinancing of assets will be distributed to investors and will not be reinvested in the business. The definition in Item 901(b) includes a specific provision to clarify this point.

²⁴ 15 U.S.C. 80a et seq.

²⁵ Item 901(b)(3). The exemption includes registered investment companies and companies that have elected to be regulated as "business development companies" under the 1940 Act.

²⁶ Item 901(c)(2).

²⁷ See Rule 421(b) of Regulation C.

²⁸ Registrants are reminded that these disclosure standards apply to all documents filed with the Commission in connection with roll-up transactions, including, for example, letters to shareholders and supplemental soliciting materials.

²⁹ As stated in the Interpretive Release, roll-up documents that have not been written in this manner will not be processed by the Division staff until the document has been so written.

³⁰ Item 903(b)(1) and Item 904.

³¹ As proposed, the summary rule required the risks and effects to be set forth first in the summary. In response to commenters' concerns that this order of presentation might confuse investors, the Instruction to the summary rule provides that the material risks and effects of the transaction must be presented prominently in the forepart of the summary. The staff in reviewing any roll-up disclosure document will raise objections to any summary that does not adequately highlight the risks and effects of the transaction.

³² Item 904(a). See also Item 503(c) of Regulation S-K which requires the risk factor section to be set forth immediately following the cover page of the prospectus, or following the summary if a summary is included.

³³ For example, if the transaction both increases the amount of management compensation and the expected term of existence of the entity, the disclosure must explain that not only is compensation increasing, but that this increased compensation will be paid for a longer period of time.

³⁴ The rules have been revised in response to comments to clarify that disclosure must be provided under the rules with respect to each entity subject to a roll-up, whether or not the particular entity is a "partnership" as defined in the rules. See Instruction to Item 901.

³⁵ Item 905.

³⁶ As proposed, Item 905 was included as Item 904(b).

³⁷ Instruction 1 to Item 905.

³⁸ Item 905(b).

³⁹ Item 915(a).

⁴⁰ Item 915(b).

⁴¹ See also Section II.A.3.e of the Interpretive Release ("If a roll-up transaction is taxable to an investor, risk factor treatment should be afforded.").

⁴² Item 909(a).

⁴³ Item 909(b).

⁴⁴ Item 907(a).

⁴⁵ Item 908(a).

⁴⁶ Item 908(b).

⁴⁷ Item 907(a).

⁴⁸ See Item 3(b) of Schedule 13E-3.

⁴⁹ Item 907(a) has been revised consistent with Item 3(b) of Schedule 13E-3 to limit its applicability to discussions with persons (or their representatives) having a direct interest in the matter discussed, such as persons considering any of the specified transactions involving the partnerships.

⁵⁰ Item 908(b)(1).

⁵¹ Item 908(b)(2).

⁵² Item 908(b)(3).

⁵³ See Item 8 of Schedule 13E-3.

⁵⁴ Item 910(a).

⁵⁵ In a transaction in which portions of partnerships may be included (e.g., if a percentage of the assets of a partnership equal to the percentage of investors that voted to approve the transactions will become assets of the roll-up successor, or the successor will own a percentage of the equity securities of a partnership equal to the percentage of investors in the partnership that voted to approve the transaction), the fairness statement must address the fairness of any combination of partnerships or portions of partnerships. Language has been added to Item 910 to clarify this point.

⁵⁶ If there are possible combinations of partnerships that would result in a different evaluation by the general partner of the fairness of the transaction to the investors in one or more entities to be rolled-up, that combination should be specifically identified and the general partners' evaluation disclosed along with the basis for that evaluation.

⁵⁷ Item 910(b).

⁵⁸ Item 910 (Instruction 3).

⁵⁹ Item 910(b)(1).

⁶⁰ Id.

⁶¹ Item 910(b)(2). This disclosure would discuss, for example, the general partner's consideration of the financial condition of the partnerships if some, but not all, of the partnerships were experiencing financial difficulties.

⁶² The liquidation analysis contemplated would be that of an orderly liquidation pursuant to the terms of the partnership agreement or other organizational documents.

⁶³ Item 910(e).

⁶⁴ Item 911. This Item has been revised (consistent with the comparable requirement in Item 9 of Schedule 13E-3) to clarify that opinions of counsel are not required to be described pursuant to this Item.

⁶⁵ See Item 9 of Schedule 13E-3. The report, opinion or appraisal does not have to be prepared for purposes of the roll-up transaction to be discloseable. The fact that a report, opinion or appraisal is not specifically prepared for the transaction is not dispositive of its relevance or materiality. See letter to Charles L. Ephraim (available Sept. 30, 1987). See also, In re Meyers Parking System, Inc., Exchange Act Release No. 26069 (Sept. 12, 1988).

⁶⁶ Item 911(a)(3).

⁶⁷ Item 911(a)(4). A specific provision concerning the exhibit filing requirement has been added to the rule as adopted for clarity.

⁶⁸ Item 911(a)(5).

⁶⁹ Item 911(b). If the roll-up is structured so that portions of partnerships may participate, the disclosure must address whether the fairness opinion covers all possible combinations of partnerships or portions of partnerships. Language has been added to Item 911 as adopted to clarify this point.

⁷⁰ Item 911(b)(2). This requirement has been revised from the proposed requirement to provide that the combinations that have been addressed must be identified, rather than the combinations that have not been addressed.

⁷¹ Item 911(b)(2)(iii).

⁷² Item 911(c). This disclosure item does not require roll-up sponsors to obtain appraisals of assets, nor does it require any appraisals that are obtained to be prepared in accordance with any particular standards. As with fairness opinions, the rules are confined to requiring information about the appraisals intended to assist investors in understanding the appraisals.

⁷³ Item 911(c)(1)-(3).

⁷⁴ An asset would be "significant" if it represents more than 10% of the value of the partnership's assets or if 10% or more of the partnership's cash flow or net income was derived from such asset. See Item 911(c)(5).

⁷⁵ Item 911(c)(4).

⁷⁶ Item 912(b).

⁷⁷ Item 912(a) and (c).

⁷⁸ Item 913.

⁷⁹ Item 902(a). If the transaction is a roll-up transaction involving more than one entity, a supplement would be required for each entity, whether or not the entity is a "partnership" as defined in Item 901(b) (e.g., if the roll-up includes one partnership and one corporation, a supplement would be required for the partnership and the corporation). See Instruction to Item 901.

⁸⁰ Thus, the valuation and allocation information required in the supplements will show the value of each significant asset owned by the partnership, while the valuation and allocation information included in the principal disclosure document pursuant to Item 906 will show each partnership's assets on an aggregate basis by type of asset (e.g., real estate assets and cash). Similarly, the management compensation and distribution information required in the supplements will show the amounts paid by the individual partnership, while the management compensation and distribution information included in the principal disclosure document pursuant to Item 905(b) will be set forth on an aggregate basis for all of the partnerships.

⁸¹ Item 902(b)(1). This Item has been revised to require a statement to be included in the supplement informing investors of the existence and availability of other supplements.

⁸² Item 902(b)(4)(i).

⁸³ Item 902(b)(7).

⁸⁴ For example, if the partnership has been experiencing positive cash flow and the pro forma statements required to be included in the principal disclosure document reflect that the successor would have experienced a negative cash flow for the comparable period, this would be discussed in the risks and effects portion of the supplement.

⁸⁵ Other nonsubstantive or clarifying changes also have been made. For example, the requirement included in proposed Item 902(a)(4) to discuss factors that may cause the method of allocating securities to be more or less favorable to investors in the partnership has been deleted since such a discussion should be included either in the effects or the fairness discussions otherwise required by Item 902. In addition, the requirement to discuss effects of the transaction in proposed Item 902(a)(1) has been revised to make clear that the discussion must address each material risk and effect of the transaction for investors in the partnership. Language has been added to the requirement to provide detailed information concerning how the partnership was valued (Item 902(b)(4)) to clarify that any other information material to an understanding of the valuation must be set forth.

⁸⁶ Item 906. Although the item specifies certain matters that must be included in the allocation table, to the extent that other or additional matters are significant to the allocation, the table should include such matters. Language has been added to the rule as adopted to clarify this point.

⁸⁷ This information is intended to enable an investor to evaluate the fairness of how his partnership was valued for purposes of the allocation in comparison to the other partnerships. The table required pursuant to this rule would show, for example, if a partnership held a substantial amount of its assets in cash or cash equivalents and other partnerships had little or no cash.

⁸⁸ Item 906(c). Language has been added to this item to clarify that the consideration paid by the general partner for interests that will be exchanged in the roll-up must set forth. For example, if the general partner will be allocated securities for its general partner interest, the amount paid for the general partner interest would be stated.

⁸⁹ See Item 4 of Part I.A of Form S-4 and Form F-4.

⁹⁰ Item 914. A clarifying amendment also has been added to Article 11 of Regulation S-X to refer to the pro forma financial statement requirements included in Item 914.

⁹¹ Item 914(b). In the event that the sponsor believes that pro forma financial statements based on other assumptions should be included, this would be permitted provided the assumptions are reasonable under the circumstances and described in an understandable manner. In addition, if the roll-up transaction is structured to permit participation by portions of partnerships, consideration should be given to the effect of such participation in preparing the pro forma financial statements reflecting a partial roll-up. See Instruction 2 of Item 914.

⁹² Pro forma financial statements based on the minimum participation standard set by the general partner do not fulfill this requirement since minimum participation may include partnerships that, although holding less assets than other partnerships, are experiencing more favorable operating results than other partnerships. In addition, minimum participation is often defined by the general partner as a percentage of the assets held by all of the partnerships (e.g., 50% of the total exchange value), and may not be achieved through any possible combination of partnerships. Pro forma statements based upon a combination that actually may occur in the roll-up should be more meaningful investors.

⁹³ Consistent with Article 11 of Regulation S-X, Item 914(c) has been revised to delete the requirement to include pro forma balance sheet data for the most recently completed fiscal year in the event that such pro forma information is provided as of a more recent interim period.

⁹⁴ See Item 3(d) of Part I.A of Form S-4 and Form F-4.

⁹⁵ Revisions to the language of some of the line item requirements in Item 914 has been included in the rules as adopted to clarify the disclosure requirements. For example, assets at appraised value has been changed to read "assets at the value assigned for purposes of the roll-up." In addition, language has been added to make clear that other selected financial information may be included if appropriate for the particular type of business, such as estimated present value of future net revenues from proved reserves in the case of an oil and gas partnership.

⁹⁶ Item 907(b) and (c).

⁹⁷ For example, information about investment objectives could be presented on a combined basis for groups of partnerships that had substantially the same investment objective(s).

⁹⁸ Such adverse developments would include, for example, defaults on mortgage debt, property foreclosures and deferral of payment of debt service or other material financial commitments.

⁹⁹ Proposed Item 914.

¹⁰⁰ See Part I.C of Form S-4 and Part I.C of Form F-4.

¹⁰¹ See General Instruction I.2 to Form S-4; General Instruction G.2 to Form F-4; Rules 14a-6(m) and 14c-2(c).

¹⁰² Rule 14e-1(a).

¹⁰³ One commenter questioned the authority of the Commission under Section 14(a) of the Exchange Act to adopt a minimum solicitation period, arguing that the time periods within which an investor vote may be taken is a matter of state law. To the contrary, the Commission's authority under Section 14(a), as well as other provisions of the Securities Act and the Exchange Act (e.g., Section 19(a) of the Securities Act (15 U.S.C. 77s(a)) and Sections 13(e), 14(a), 14(c), 14(e) and 23(a) of the Exchange Act (15 U.S.C. 78m(e), 78n(a), 78n(c), 78n(e) and 78w(a)), does encompass the rule adopted today, and the Commission has exercised its authority to establish minimum solicitation and offering periods under the Securities Act and the Exchange Act in various other contexts. For example, the business combination registration statement forms, Form S-4 and Form F-4, require that a combined proxy statement/prospectus be mailed to securityholders at least 20 business days before a meeting if information concerning the registrant or the companies to be acquired is incorporated by reference into the disclosure document. See Instruction A.2 to Form S-4; Instruction A.2 to Form F-4. Other minimum periods include the 20-business day offering period applicable to tender offers under Rule 14e-1(a), the 20-calendar day solicitation period for going-private transactions under Rule 13e-3(f), and the 20 calendar-day period applicable to the dissemination of information statements in connection with meetings for which proxies will not be solicited under Rule 14c-2(b).